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Do you want to password protect a shared folder? Or do you want to encrypt a folder so anyone who does not login as your account cannot access your folder? Or do you want to encrypt the folder so no one, including your account, can access the file without decrypting it.
I am assuming you want the most secure situation (scenario 3). For my sensitive files I use a great open source program called TrueCrypt (http://www.truecrypt.org/). The program works really well, you know it isn’t installing back doors in your encryption because the source code is available, and you have multiple forms of encryption to choose from.
I believe this is your best option. I would not trust any encryption in Windows XP (e.g., encrypt this folder option) because the Windows XP password hash file can be easily cracked if someone has physical access to your computer.